MOSCOW, Aug 30 (Reuters) - The rise of Russia’s Otkritie bank - brought to an abrupt halt this week with a central bank bailout - was a tale of breakneck growth, lavish parties and support from within President Vladimir Putin’s inner circle.

At a time when Russia’s biggest banks were retrenching due to the world economic slowdown and Western sanctions on the country, Otkritie was snapping up assets from diamonds to pension funds and rival banks.

It grew to become Russia’s biggest private bank, although only the seventh largest overall behind state lenders. During this rise the seeds of Otkritie’s problems were sown, according to the central bank, even before it finally stumbled in an ill-fated attempt to grow into insurance.

“Otkritie group was growing very rapidly by all measures over recent years and this was financed by debt, while major risks were taken by the bank,” Dmitry Tulin, first deputy chairman at the central bank, said.

“The bank’s capital was clearly insufficient compared with the operations it undertook and the amount of risk,” he told a briefing on Tuesday.

At many steps along the way, Otkritie enjoyed the support of state-owned VTB, Russia’s second-biggest bank.

VTB’s chief Andrei Kostin is well connected: his office wall is decorated with photographs of himself posing with Putin.

However, VTB’s own growth has been curbed for the past few years. It has been called on to prop up major Russian industrial groups struggling to repay their loans and it spent years absorbing a failed lender, Bank of Moscow.

On top of that, the Western sanctions imposed over Russia’s role in the Ukraine crisis have restricted VTB’s access to international debt markets.

VTB did not immediately respond to Reuters questions about its ties to Otkritie.

However, several Russian bankers who spoke to Reuters before the bailout described Otkritie as a private extension of VTB.

During a banking crisis in 2009, VTB bought a 20 percent stake in the Otkritie group, selling its holdings five years later. Then in 2015 VTB got a 9.9 percent stake in the group after the state bank converted a loan it had made to an Otkritie-related company into equity.

VTB bank also funded many of Otkritie’s acquisitions. In 2012, VTB provided the finance for Otkritie to buy Nomos Bank, a deal that catapulted Otkritie into the front rank of Russian banking. In September 2014, VTB sold part of its stake in Cyprus-registered RCB bank to Otkritie.

In May this year, Otkritie also closed a $1.45 billion deal to buy the diamond business of energy group Lukoil. VTB partly financed that deal, Interfax news agency reported.

ACQUISITION TRAIL

The group that controls Otkritie started to expand its banking business in 2008, snapping up a small lender, RBR, and renaming it Otkritie. As of the second quarter this year, Otkritie Bank had assets of 2.45 trillion roubles ($42 billion), according to Interfax data.

In total, it has snapped up more than 10 banks, including Nomos, Bank Khanty-Mansiyisk and Petrocommerce, which used to be closely linked to Lukoil.

In 2014 Otkritie took over the troubled Trust bank in a central bank-approved bailout. This rescue gave access to cheap central bank funds, but also burdened it with problematic assets.

It was an attempt to buy the Rosgosstrakh insurance company late last year that finally tipped Otkritie over the edge, officials said. This would have made Otkritie group the country’s top insurer.

Otkritie’s owners, in preparation for the planned acquisition, poured 40 billion roubles of the bank’s money into helping the insurer with its liquidity problems. Rosgosstrakh posted a net loss of 33 billion roubles last year.

Otkritie underestimated the insurer’s problems, said Tulin. “The bank has spent a significant amount of liquidity ... and it became obvious it would have to acknowledge a fall in its capital adequacy ratio,” Tulin said.

“At a certain point, the bank’s shareholders realised they couldn’t solve the problem with capital on their own. Operations with Rosgosstrakh became the catalyst for the (bailout) process.”

As late as June this year, Otkritie was projecting the image of an ambitious, successful bank.

In the Russian business world it was renowned for its loud parties, especially those it threw each year during an international economic forum in St Petersburg.

On a rainy evening in June, business associates, officials and journalists alike packed into a courtyard in the city centre that had been transformed into a party venue.

Executives from gold producers and energy companies sipped cocktails along with government officials, while listening to DDT, one of the Russia’s top rock bands.

“This is the best thing about the Forum,” a government official told Reuters the following morning. ($1 = 58.4125 roubles) (Additional reporting by Alexander Winning in LONDON; Editing by Christian Lowe and David Stamp)